A pensions time bomb spells disaster for the US economy

Underfunded government pensions to the tune of $1.3 trillion,
with a gap that just can’t be filled, is the ticking time bomb
facing the US economy, which faces dramatic cuts in public
services and potentially riots reminiscent of Athens six years
ago.

Danielle DiMartino Booth is the tough talking former Federal
Reserve advisor and President of Money Strong, with an insider’s
perspective on finance. As she picks apart the danger signs with
the US on the precipice of recession, it’s the impending pensions
crisis that’s really keeping her awake at night.

With so few people privy to what little recovery we’ve had and
given how stretched pensions are, checks are going to have to be
written from Washington sooner than you think, DiMartino Booth
told Real Vision TV in
an interview.

“The Baby Boomers are no longer an actuarial theory,” she said.
“They're a reality. The checks are being written.”

A bulldozer couldn’t fill the state pensions gap

The $1.3 trillion pensions deficit just takes into account state
and municipal obligations and with promised returns of 8% and
funds compounding at 3% for decades it will take nothing short of
an economic miracle to recover. “The average state pension in the
last

fiscal year returned something south of 1%. You cannot fill that
gap with a bulldozer, impossible,” DiMartino Booth said. “Anyone
who knows their compounding tables knows you don't make that up.
You don't get that back unless you get some miracle.”

The last time we saw significant market weakness, the baby
boomers pretty much accepted that they would be retiring at 70
instead of 65, she added. “Well, guess what? They're turning 71.
And the physiological decision to stay in the workforce won't
work for much longer. And that means that these pensions are
going to come under tremendous amounts of pressure.

“And the idea that we can escape what's to come, given
demographically what we're staring at is naive at best. And it's
reckless at worst,” DiMartino Booth said. “And when you throw
private equity and all of the dry powder that they have -- that
they're sitting on -- still waiting to deploy on pensions’
behalf, at really egregious valuations, yeah, it's hard to sleep
at night.”

The interview with Real Vision was held in Dallas, which
DiMartino Booth said is Ground Zero for the pensions crisis,
where returns for the $2.27 billion Police and Fire Pension
System have suffered due to risky investments in real estate made
over a decade ago.

Huge withdrawals are now taking place, amid concerns over the
future viability of the pension scheme, which commentators say
could be flat broke in a little over ten years. “We're seeing
this surge of people trying to retire early and take the money.
Because they see it's not going to be there. And if that dynamic
and that belief spreads-- forget all the other problems,”
DiMartino Booth said. “The pension fund -- underfunding is Ground
Zero.”

The gravity of the situation with the lack of returns is
magnified by the fact that the underperformance has been going on
for between ten and 15 years. Calpers, the California Public
Employees’ Retirement System is a case in point, amid reports
that it returned just 0.6% last year compared with its long term
target of 7.5%.

With the legal language tightly written on pensions like this
across the country, such that states and municipalities won’t be
able to break free of their obligations, DiMartino Booth thinks
the endgame will evoke memories of the Winter of Discontent in
London in 1979 and more recently the riots in Athens as key
public services are cut.

Angry country, angry world – The wealth effect is dead

“This is where the smile comes off my face. We are an angry
country. We're an angry world. The wealth effect is dead. The
inequality divide is unlike anything we've seen since the years
that preceded the Great Depression,” she told Real Vision TV.

File
photograph shows former British Conservative Prime Minister
Margaret Thatcher at a Conservative Party
conferenceThomson
Reuters

“Where's the money going to come from? And the answer is, for
now, they cut services. I've just written about the Winter of
Discontent and the rubbish piled up in central London streets in
1979, as Thatcher was coming in. I worry about the ambulance not
getting there in time. I worry about firefighters being cut to
the bone and policemen.”

The seriousness of the issue might not have hit home yet in
Denver, where the state budget for tulips had to be cut recently
to top up the pension fund, she said, but what happens when you
are not talking about flowers anymore and when you are talking
about a very populous state like Illinois?

“If the actuaries are going to force the checks to be written and
reduce the rate of returned assumptions to anything remotely
related to reality, then we won't be laughing anymore looking in
the rear view mirror at the riots in the streets of Athens a few
years back,” DiMartino Booth warned.